Using prepaid debit cards for profit extraction to reduce profits and disguise income (Spotlight 68)
Find out about a scheme that uses advertising and marketing expenditure to reduce profitability and disguise income in the form of redeemable loyalty points.
HMRC is aware of a scheme being marketed that aims to reduce companies Corporation Tax liabilities by including expenditure for ‘advertising’ in the profit and loss account of the user. The company claims this expenditure is tax deductible. However, an amount equal to at least 80% of the amount spent is returned personally to the directors or employees in the form of ‘loyalty points’.
These ‘loyalty points’ are immediately converted to monetary amounts charged to prepaid cards issued in the names of the directors or their associates. The directors of the companies, their associates or both use the prepaid cards to spend the amounts. It is claimed that these ‘loyalty points’ are not taxable income for the directors and associates.
HMRC’s view is that this scheme does not work, and we will challenge anyone promoting such arrangements. People who use these arrangements may have to pay more than the tax they tried to avoid as well as paying interest, penalties and fees for using such schemes.
How the arrangements are claimed to work
The arrangements are designed to enable profit extraction and avoid payment of income tax by allowing the company directors to disguise money they receive and reduce their tax liabilities. It also seeks to claim Corporation Tax and VAT input tax deductions for the company.
The arrangement typically works as follows:
- A limited company buys ‘advertising’ from the promoter of the arrangement.
- The company claims Corporation Tax and VAT input tax in respect of ‘advertisement’ costs incurred.
- The company directors (or their associates) receive an amount often equal to at least 80% of the ‘advertising’ spend in the form of loyalty points.
- These loyalty points are converted by the promoter on a 1 for £1 basis cash amount which is charged to a prepaid card.
- The cards are then made available for directors and associates to be spent or used at their own discretion.
Why you should not use these arrangements
Receiving and redeeming of such loyalty points provided by third parties involved in the arrangement is taxable income for the directors. These amounts should be accounted for as income of the director.
Corporation Tax deductions claimed by the companies may also not be an allowable expense for tax purposes because they are not wholly and exclusively for the purpose of the business.
There could also be implications for the limited companies if they have reclaimed VAT incurred in relation to the use of this scheme as input tax, as it may not be recoverable.
This spotlight does not include the benefits an employee may acquire in the same way as any other member of the general public, for instance air miles, petrol tokens or credit card points acquired by buying goods or service on which such benefits are given. You can find out more in the HMRC Employment Income internal manual at EIM21618 — Particular benefits: air miles, credit card points etc.
What to do if you’re using this arrangement
If you think you’re already involved in this arrangement and want to get out, HMRC can help. HMRC offers a range of support to get you back on track or avoid being caught out in the first place. Contact HMRC if you have any concerns.
If you’re using this or similar schemes or arrangements, HMRC strongly advises you to withdraw from it and settle your tax affairs. You can contact HMRC and we will tell you what further information we require.
Anyone concerned about the schemes they are currently using should also consider:
- getting independent professional tax advice
- speaking to one of the tax charities such as TaxAid — find out more about the TaxAid helpline on the TaxAid website
What this means for promoters
Scheme promoters must comply with the disclosure of tax avoidance schemes (DOTAS) legislation ensuring that arrangements they are marketing are disclosed to HMRC.
Promoters may be liable to a penalty if they fail to disclose a scheme to HMRC within 5 days of the scheme being made available or implemented. The initial penalty is up to £600 a day. In cases where the penalty is less than £1 million it may be increased up to £1 million in certain circumstances.
HMRC can publish information about tax avoidance schemes we are aware of, and about the people involved in the supply and marketing of these schemes.
HMRC will pursue anyone who promotes or enables tax avoidance. This includes using the enablers penalty regime for anyone who designs, sells or enables the use of abusive tax avoidance arrangements which are later defeated by HMRC.
HMRC will also use its powers under the Promoters of Tax Avoidance Schemes regime against those who continue to promote tax avoidance schemes.
Report a scheme
You can report tax avoidance arrangements, schemes and the person offering you them to HMRC using our report tax fraud or avoidance online form. You can submit this form anonymously and do not have to give your name, address or your email.
You can phone HMRC to report tax fraud or avoidance if you cannot use the online form.